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So I recently sat down with a number of treasury and finance executives for an insider’s view on how companies approach the refinancing process and the insights a trusted banking partner should provide.
An upcoming maturity date is undoubtedly a big factor that drives refinancings. What would you say is the next most important consideration?
Other than M&A or other strategic drivers, I would say potential for change in credit conditions or credit outlook—either for the banking market or the company itself. If the company is approaching a strategic cycle that requires more certainty of lending, then it can be helpful to get in front of that. Similar drivers may lead to an “amend and extend” approach—often to simply push out the window of liquidity access certainty—sort of a hedge against unforeseen circumstances.
A refinancing may also be driven by upcoming changes in the regulatory environment that could change a bank’s lending strategy. Another primary consideration is timing needed to maximize achievement of an optimal capital structure, especially for infrequent issuers looking to combine or change levels or form of debt/equity that may require different issuance size.
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While it is difficult to pin it on an absolute number, it is easy to keep a calculation of “breakeven” for rates, fees and other hard costs. But there is always an element of uncertainty when launching a refinancing that requires judgement based on the likelihood of success and access to the current market, which ebbs and flows. Of course, for frequent or strong credit issuers, this may be much easier to estimate.
There is also the matter of timing—specifically, whether the refinancing fits with other maturities, payoffs and issuances planned in the capital structure. We look at the overall trend in interest rates and the global factors related to those movements. In the current interest rate environment, I would say that an actual or expected change of 50 basis points over our planning horizon would pique my interest.
DO YOU TYPICALLY APPROACH YOUR CURRENT ADMINISTRATIVE AGENT AND KEY RELATIONSHIP BANKS WITH A REFINANCING WISH LIST OR PROPOSED BUSINESS TERM SHEET? (Heading 4)
Normally, I will have tested the current markets with a few key banks so that I have some idea of what to expect, and can then start a specific conversation with the banks to vet my expectations on desired terms and pricing.
I keep a file of key aspects of deals of peers of similar credit quality that are of interest and make sure that, if there are terms in a peer’s deal that are attractive, I include it in early conversations with the arrangers. Also, we research potentially contentious points in an effort to find precedents where the agent or a large portion of the bank group have given such issues to others. This can be a lot of work, but has proven very effective.
HOW DO YOU SIZE A FACILITY AND DETERMINE THE ALLOCATION BETWEEN COMMITTED AMOUNT AND ACCORDION? ARE THERE FACTORS YOU WOULD CITE AS IMPORTANT CONSIDERATIONS IN ADDITION TO THE COST OF UNDRAWN LINE FEES? (Heading 4)
For us, the sizing is mainly about a match with our business strategy. I need enough to fund global operations and potential working capital. That can vary with currency and product pricing, so I am willing to pay for some cushion. Accordions are a good feature to have as they offer flexibility to expand without a full refinancing, but they are not a sure thing. Because we cannot offer a lot of ancillary business for our bank group, undrawn line fees help keep the relationship attractive to our lenders.
WHAT FACTORS DO YOU CONSIDER AND WEIGH MOST HEAVILY IN SELECTING AN ADMINISTRATIVE AGENT/LEAD LENDERS FOR A REFINANCING? (HEADING 4)
We like to develop long-term relationships so that there is good institutional knowledge of our business and needs. For example, we have a few atypical definitions in the credit agreement that are understood and supported by the credit side of the lead bank. For us, the top banks need to be international and offer access to strong internal resources with expertise and knowledge in a variety of financial markets. They also should be able to attract other banks to participate in the group.
I like to have enough lead lenders so there is some competition among them, but not so many that ancillary business is spread thin and not interesting to them. The administrative agent needs to have reliable back office support, but generally any of the “majors” can do this. The administrative agent role is mainly earned through a combination of relationship and larger commitment dollars.